GOP Tax Law Bails Out Fracking Companies Buried in Debt

By Justin Mikulka • Thursday, April 26, 2018 – 08:44

EOG Resources is one of the top companies in the fracking industry, and thanks to the new tax bill passed by Republicans and President Donald Trump at the end of last year, EOG had an exceptionally strong year compared to 2016.

In 2017, the company reported a net income of $2.6 billion. The previous year? A loss of $1.1 billion. That financial turnaround seems very impressive until you realize that $2.2 billion, or about 85 percent, of its 2017 income was the result of the new tax law. Without that gift from the GOP and Trump, EOG would have lost approximately $700 million between those two years. Instead they are $1.5 billion ahead of the game.

With numbers like these, it is easy to see how the Tax Cuts and Jobs Act of 2017 was a much-needed lifeline for the money-losing fracking industry. EOG is routinely touted as one of the best shale oil and gas companies. Yet the company still lost $700 million in the past two years. Or at least it would have if not for the tax bill.

This is the same company that an analyst at the investment advice website Seeking Alpha says is “generally considered one of the best unconventional upstream oil and gas players in the business, and its financials back it up.” If those are the best financials in your industry, your industry has a big problem.

An interesting side note is that EOG stands for Enron Oil and Gas, which was spun off as its own company from Enron — the company notorious for one of the great energy Ponzi schemes of the 20th century. Today, an Enron spinoff company is being held up as the most fiscally sound in the shale oil industry.

And Seeking Alpha is now pushing EOG as a good investment and wondering when “the equities market will wake up and smell this opportunity” despite EOG still being over $6 billion in debt. Without the tax overhaul it would be much harder to make this argument.

There is one prominent person in the shale industry warning against rosy forecasts for shale oil, and that is Mark Papa, head of independent oil company Centennial Resource Development. Papa’s last job? CEO of EOG Resources.

Continental Resources is another of the shale companies being heralded as a good investment in 2018. Continental is run by Harold Hamm who was an advisor to the Trump campaign and has taken the title of “Shale King” that once belonged to Aubrey McClendon. Hamm’s net worth is estimated at over $13 billion.

Thanks to the new tax law, Continental took home an extra $700 million because its effective tax rate for 2017 was negative 406 percent.

Continental Resources 2017 Annual 10-K Filing

And Continental needed that money (although Hamm certainly doesn’t). In 2007 Continental had $165 million in debt and paid $13 million a year in interest on that debt. In 2016 its debt had ballooned to $6.5 billion and the annual interest payments rose to $321 million. The GOP tax law essentially pays off two years of Continental’s interest payments, allowing this failing business model to continue because Continental has not been generating enough income to pay even the annual interest on its debt.

While the company he leads is drowning in $6.5 billion of debt, Harold Hamm is personally worth twice that amount. He’ll be fine. He was easily able to afford one of the most expensive divorce settlements ever.

These are just two examples of shale companies receiving an immediate financial lifeline from the GOP tax bill. These companies also will benefit from lowered tax rates in future years. However, this one-time handout simply masks the reality that the shale revolution looks a lot like a Ponzi scheme enriching CEOs and Wall Street financiers by producing oil and gas with borrowed money that is unlikely to be paid back in the future.

And Hamm and the Wall Street financiers have no incentive to do anything differently. Sure bankrupt energy companies destroy worker pensions, wipe out investors equity, layoff thousands of workers — but if we use the coal industry as an example — CEOs will still get bonuses after driving their companies into bankruptcy.

Tax Bill Especially Beneficial to Oil Companies

The benefits of the new tax bill are certainly not unique to oil and gas companies. Utility companies did even better and the big Wall Street banks who are financing the cash-burning shale industry also are awash in new profits thanks to the GOPtax overhaul.

However, due to the nature of how oil and gas companies book profits and losses — and the epic money-losing streak the shale industry created over the past few years — these companies benefited more than most.

To be clear — this bill which was signed at the end of 2017 was applied to the deferred tax liabilities that were already on the books — thus erasing a large chunk of the liabilities for these companies that had built up while the industry kept borrowing to drill more and ultimately lose more money. Simply a bailout of reckless financial behavior by any other name.

And it wasn’t just the companies primarily working in shale that benefited. ExxonMobil raked in a $6 billion benefit from the new tax law, which even CNN Money referred to as a “gift.”

Industry Will Use Bailout to Borrow and Drill More

In discussing the trade deficit President Trump recently tweeted the following:

While the mainstream media is pushing the industry message that shale companies now are focused on profits instead of just production volume, record U.S. oil production and predictions for even greater increases would appear to reveal the lie in that promise. Just as most sharks must swim to stay alive, shale companies must drill to preserve CEO bonuses, which are often tied to oil production, not profits. So, they drill. Even when that means losing money on nearly every barrel of oil they pump.

A graphic from the Wall Street Journal reveals just how much money the shale industry has been losing compared to traditional oil — all while CEOs such as Harold Hamm were amassing billions in personal wealth. The shale oil industry generated free cash flow pumping oil for one brief period in the last seven years. Hamm has done a bit better personally during that time frame.

Shortly after President Trump signed the new tax bill, he took another vacation to Mar-a-Lago where he reportedly told those in attendance: “You all just got a lot richer.”

A rare moment of honesty from the President. And while he wasn’t speaking specifically to shale oil CEOs — it’s safe to say they got the message loud and clear.

Another voice: ‘The greenest corner in the richest nation on earth’

By Robin Cody, August 19, 2016A group of protesters block an oil train in Vancouver, Wash., on Sunday. Photo from Inside Climate News, courtesy of Alex Milan Tracy

The fiery wreck of an oil train at Mosier is what galvanized many of us to sit on the Burlington Northern railroad tracks in downtown Vancouver on June 18. Twenty-one protesters, ranging in age from 20 to 84, were repeatedly warned of 90 days’ jail time and $1,000 fines for criminal trespassing. And still, we sat.

Protesters got arrested and briefly jailed. Our legal status remained in limbo until recently, when criminal charges were dismissed.

Now we can talk.

The whole idea — of fracking North Dakota and shipping flammable crude oil by rail through the Columbia River Gorge — is not just a threat to people who live near the tracks. It’s also a violation of nature. It’s a big wrong turn in America’s supposed transition from fossil fuels to renewables.

It’s 2016. About climate change and its causes, the evidence is in. Time is running out. Yet many more tanker loads of climate change could come barreling through the Gorge. The proposed Tesoro Savage Vancouver Energy Project would be the largest oil-by-rail terminal in the Northwest. It would more than double the daily frequency of mile-long oil trains to the Port of Vancouver.

If civil disobedience does any good, it’s in the context of many other groups and individuals speaking out. There were rallies in Hood River and Astoria, tribal action in Mosier, and the alarm expressed by city councils of Vancouver and Portland and Spokane. Columbia Riverkeepers, 350pdx, and many other organizations put the spotlight on industries that contribute to, and profit from, America’s dependence on fossil fuels.

This is about where we live. It would be fundamentally unlike us Cascadians, of all people, to cooperate with big oil’s distant profit.

The world expects the United States to take the lead with climate action. The U.S. looks to California and the Northwest. So here we are, in the greenest corner of the richest nation on Earth. If we don’t step up for the planet, where in the world will momentum take hold? And when we do take a stand, it might really make a difference.

Robin Cody of Portland is the author of “Ricochet River” and “Voyage of a Summer Sun.”

Significant funding gap in Colorado fracking fight

Committees fighting proposed Colorado ballot measures that would limit fracking have raked in about $15 million in donations this year, more than 35 times the contributions of groups backing the measures.

About 90 percent of the anti-ballot measure donations have come from energy companies, including $10.5 million from Anadarko Petroleum Corporation and Noble Energy alone.

“We’ve never seen a number like this from the opposition,” said Luis Toro, executive director of Colorado Ethics Watch, the state government watchdog group that released the numbers confirmed by the Coloradoan. “It shows that (businesses) are ready to spend a lot of money in the best interest of the company’s bottom line.”

In contrast, individual donations of less than $1,000 have been the primary fuel for the pro-ballot measure efforts, bolstered by support from U.S. Rep. Jared Polis, his father and the executive director of the fundraising committees. The pro-ballot measure committees have received about $424,000 in donations this year.

Petitioners submitted signatures for proposed ballot measures 75 and 78 on Aug. 8, the day they were due. The Secretary of State will declare the signatures sufficient or insufficient by Sept. 8. If the office confirms petitioners collected about 98,500 valid signatures for each measure, they’ll appear in the November election.

Measure 75 would amend the state constitution to allow local control of oil and gas development, effectively overturning the Colorado Supreme Court’s denial of Fort Collins’ fracking moratorium and Longmont’s fracking ban.

Measure 78 would amend the state constitution to increase setbacks for oil and gas development from 500 feet to 2,500 feet from occupied structures. The measure would also require a 2,500-foot setback from “areas of special concern,” a category that includes most water sources and riparian areas, parks, sports fields, playgrounds and public open spaces.

The current setback of 500 feet is about the length of 1 1/2 football fields. The proposed setback of 2,500 feet is about a half-mile. It would apply only to new development — but the ballot measure includes reentry of existing wells in its definition of “new development.”

Two committees are working on each side of the proposed ballot measures: Yes for Health and Safety Over Fracking and Yes for Local Control Over Oil and Gas are on the pro-ballot measure side. Protecting Colorado’s Environment, Economy and Energy Independence and Vote No on 75/78 are on the anti-ballot measure side.

About 30 percent pro-ballot donations were in the form of services from organizations like Food and Water Watch and Greenpeace. Those services are assigned cash values for record-keeping purposes.

“A successful ballot initiative usually costs at least a million dollars,” Toro said. “That might be an indication of where they’re headed.”

The committees could see a cash infusion if they’re approved for the ballot, Toro added. Committee representatives weren’t available for comment.

The anti-ballot measure committees have received about $15 million in donations this year, not including about $746,000 Protect Colorado had on-hand on Jan. 1. About 10 percent of those donations were in the form of services.

“These measures are so extreme and such a threat to Colorado’s economy that we’ve got the commitments to spend $24 million to fight them,” Protect Colorado spokeswoman Karen Crummy said. “We’ve been very upfront about that from the beginning.”

The anti-ballot measure committees have spent 20 times more than the pro-ballot measure groups as of Aug. 1 — $5 million versus about $250,000, according to data from the Secretary of State’s office. Also as of Aug. 1, the anti-ballot measure side had roughly $9.1 million to the opposition’s $43,000.

Lists of top monetary donors for each side of the issue give you a good idea of how their fundraising has taken shape.

The American Petroleum Institute, the national trade group representing the oil and gas industry, funded about $1.1 million worth of consulting and other services for Vote No on 75/78 but isn’t on this list because the donations were considered non-monetary.